Capital Allowances and Depreciation, Explained

Buy a delivery van for ₦5,000,000 and you will write that ₦5,000,000 off twice. Once in your accounts, at a rate you choose, over the years you judge the van will last. Once again in your tax computation, at a rate the law sets, over a number of years you have no say in.

Two schedules, one asset, and at every point in between they hold different figures. That is not duplication and not an error waiting to be reconciled — it is what the two are for. The difference stays quietly invisible right up until the day you sell the van, at which point both schedules have to produce a number and the two numbers disagree.

Two schedules, two questions

Book depreciation spreads an asset's cost across its useful life for financial reporting. It exists to present an honest picture of performance and asset value over time, and the rate is a policy you choose — your judgement about how quickly the thing is actually being used up.

Capital allowance is tax relief for the same expenditure, at a rate set by the rules according to which class the asset falls into. It exists to determine taxable profit, and your opinion about the asset's useful life has nothing to do with it.

One replaces the other — literally

It is tempting to picture the two schedules as competing estimates that someone weighs up. They are not. The tax computation takes your accounting profit — which already has your depreciation subtracted from it, because accounting profit does not care what is deductible — and adds that depreciation straight back. All of it. Depreciation is disallowed outright for tax. Capital allowance is then deducted in its place, and it is the only route by which money spent on an asset relieves tax at all.

The same swap happens at disposal. Whatever gain or loss your books recorded on the sale is backed out of the computation entirely, and the chargeable gain measured on the tax residueNTA 2025 s.39(a) goes in instead. Both halves of the accounting treatment are removed and both are replaced.

Which also explains why nothing in this article asks you to reconcile the two. There is no reconciliation to perform: one number is deleted and another substituted. A tie between them would be a coincidence, not a control.

Where they diverge, on real numbers

How far apart do they actually get? Below is one conventional set of book depreciation rates — the defaults Core Ledger ships, which are a reasonable accounting policy rather than anything the Act sets — against the capital allowance rate for the same asset. Across the full 14 asset types in the Nigerian classification set, the two columns disagree on 8. The 6 that happen to agree — plant, mining assets, motor vehicles, communication infrastructure and agricultural expenditure — arrive at the same figure from two unrelated directions rather than by design, and nothing holds them there once you set a book policy of your own.

Notice the gaps run in both directions. A building writes off in five years in the books and ten for tax — the books are faster. Furniture goes the other way. Heavy transportation shows the widest spread on the list, writing down in four years in the books while the allowance takes ten. There is no consistent bias to correct for, which is exactly why the two have to be tracked rather than derived from one another.

Watch the two run

The same ₦5,000,000 asset on both schedules. Change the asset type and how long it is held, then look at what a sale produces on each side.

Disposal is where it stops being academic

For as long as you hold an asset, the two schedules just sit there being different. Sell it and both have to produce a number, measured from wherever each had got to:

• Your books compare the proceeds against the asset's carrying value — cost less accumulated book depreciation — and record the difference as a gain or loss on disposal.
• Your tax computation compares the proceeds against the asset's residue — cost less the capital allowance actually claimedNTA 2025 First Sch. Pt I, para 8(1) — and anything above it is a chargeable gain, taxed as part of total profitsNTA 2025 s.39(a).

Same sale, same proceeds, two different subtrahends. There is no arithmetic that turns one into the other, and there is no version of this where they agree unless the two rates happened to match all along. The mechanics of the tax side — including why there is no balancing allowance when proceeds fall short — are covered in the practical guide to the Act.

Depreciation tells your shareholders what the asset was worth to you. Capital allowance tells the tax authority what it was worth to them. There was never a reason for those to be the same number.

Only one of the two is ever posted

This is the detail that makes the rest click, and it is rarely spelled out. Book depreciation is a bookkeeping entry: each period it posts a debit to depreciation expense and a credit to accumulated depreciation, and it moves your profit. Capital allowance posts nothing. It is a computation performed on top of your books to arrive at taxable profit, not a transaction inside them.

The same asymmetry survives to disposal: the gain or loss your books calculate is posted to a real account and appears on your profit and loss. The chargeable gain the tax computation calculates is never posted anywhere in the ledger at all. If you go looking for it in your accounts you will not find it, and that absence is correct.

Assets that predate your records

Both schedules have a migration problem, and they have different ones. An asset bought two years before you started keeping books in a given system has already been depreciating for two years, and entering it as though it were new overstates what you own — so its accumulated depreciation has to be caught up to where it should already be, not restarted from zero. Any system worth using does this for you; a spreadsheet rebuilt from scratch usually does not.

The tax side of the same migration is a separate, one-time figure, and it is easy to miss because it lives on a different screen — the opening unrecouped capital allowance balance. If you are carrying forward assets that already had allowances claimed against them, that figure is what stops the tax computation from starting over.

What to actually do about it

The two numbers were never going to agree, and no amount of care will make them. What understanding the difference buys you is the ability to read your own reports without flinching at it — and to recognise, on the day you sell something, that two different figures from one sale is the system working rather than failing.

Everything above is general information about published rules, not advice about a particular asset or disposal. Book depreciation rates shown are Core Ledger's defaults and are yours to set; the capital allowance rates are the same ones the engine computes against. For a material disposal or an unusual asset, confirm the treatment with your accountant before filing.